Future of Genworth PMI unit takes shape after feds OK acquisition

Genworth Financial's mortgage insurance business, which had slipped in market share, has more certainty about its future prospects after a federal government committee approved the holding company's acquisition by China Oceanwide.

The approval provides mortgage companies with some clarity about the future of the Genworth PMI business, which likely would have been spun off or sold if regulators had rejected the acquisition. The deal will keep Genworth's PMI business as part of a larger insurance firm, rather than as a standalone or absorbed into one of the industry's five other PMI providers.

Uncertainty regarding the financial future of the company likely played a role in Genworth MI's losing new insurance written share to Essent starting with its second-quarter 2016 earnings call.

During the call, held prior to agreeing to this deal, Genworth management said the next step following what was then a planned separation of its troubled long-term care insurance business could have been splitting off the MI unit from its life insurance operations. Isolating the business was looked upon as a way to keep the MI unit unaffected by losses in the life insurance lines.

Those plans were put on hold after the agreement with China Oceanwide to acquire Genworth Financial was announced in October 2016.

Genworth started losing NIW share to Essent in the fourth quarter of 2016 and was passed by the upstart in the first quarter of 2017.

The gap is narrowing again. In the first quarter, Essent had NIW of $9.3 billion, when Genworth had $9 billion.

Since recovering from problems in the aftermath of the housing crisis, the U.S. MI business has been one of the bright spots for Genworth. In the first quarter it reported adjusted operating income of $111 million, compared with $74 million in the fourth quarter last year and $73 million in the first quarter of 2017.

Among the contingencies for the Committee on Foreign Investment in the U.S.'s approval of the deal was for Genworth to use a third-party service provider to manage and protect the personal data of its U.S. policyholders, including those of its mortgage insurance business. The CFIUS rejected another Chinese company's deal, Ant Financial's acquisition of MoneyGram, because of data protection issues.

Genworth announced last November it was looking at a partial sale of the U.S. mortgage insurance subsidiary if the CFIUS did not approve the transaction by the time it needed to pay off debt coming due in May. While that maturity was satisfied through a new debt offering, the possibility remains that Genworth could sell all or part of the U.S. mortgage insurance operations as well as its investments in MI companies in Australia and Canada if the China Oceanwide does not close. The deal still must be approved by the Delaware Department of Insurance and regulators in China.

In its standalone contingency plans filed with the merger proxy, Genworth contemplated an initial public offering of 19.9% of the U.S. mortgage insurance business and a sale of its 57% stake in its Canadian MI unit.

In its second-quarter 2016 earnings call, held prior to agreeing to this deal, Genworth management said the next step following what was then a planned separation of its troubled long-term care insurance business could have been splitting off the MI unit from its life insurance operations.

The U.S. mortgage insurance business has a standalone value of $3.2 billion, according to a June 7 report (issued before the CFIUS approval was received) from Keefe, Bruyette & Woods. That value is based at 7.5 times the company's estimated 2019 earnings per share and 1.3 times its book value. It puts a standalone Genworth U.S. MI at a slight premium to the two largest monoline MI companies, MGIC (valued based on 7.3 times 2019 estimated EPS and 1.27 times book value) and Radian (6.4 times 2019 estimated EPS and 1.18 times book value); those companies have depressed valuation following year-to-date weakness, the KBW report said.